How Can The NZ Economy Stay Afloat Amid A Global Recession Spell?

Friday, 9 December 2022, 8:34 pm
Press Release: Kalkine

Summary

• Global recession fears and rapidly increasing interest rates have spurred speculations of a slowing economy in NZ.
• The RBNZ raised the cash rate to 3.5% in October, with a revision to the rate expected on November 23rd, 2022.
• Booming tourism and high consumer spending have helped stabilise the economy amid recessionary fears.

A weakening global economy has signalled national authorities to prepare for the headwinds that may follow. With falling commodity prices and more rate hikes slated to occur, many of the world’s strongest economies are experiencing stalling economic growth. The economic outlook for New Zealand also appears to be bleaker as a global recession looms large.

The year 2022 began with most nations opting for tighter monetary policies and contracting demand, which fuelled speculations of a recession in the coming months. The RBNZ took up interest rate hikes in the early stages of economic recovery, much earlier than some other central banks. However, official cash rate (OCR) hikes may take time to show an effect on the economy.

The strong economic conditions developed over the past few years are likely to even out and result in a weak economy, making layoffs and unemployment a common side effect of the process. As inflation has yet to show a solid sign of slowing down, authorities might look at rate hikes in the future as well. However, demand in NZ continues to remain somewhat stable, making economists slightly optimistic about the future state of the economy.

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Economy under pressure

Inflationary pressures have weighed down on the NZ economy, though the impact has not been as profound as seen in some other nations. According to Statistics NZ, the GDP growth in the country fell 0.2% in the quarter leading up to March 2022. A slow pick-up in GDP growth of 1.7% in the subsequent June 2022 quarter followed this drop.

With inflation posing as the strongest headwind for the Reserve Bank of New Zealand (RBNZ), all eyes are now on the cash rate. The RBNZ raised the cash rate to 3.5% in October, and a further increment in the rate might be underway as the Monetary Policy Committee will deliver a decision on November 23rd, 2022.

Analysts expect the cash rate to leap beyond the 4% level in 2023, with RBNZ also hinting in the same direction. However, an interest rate hike to 4% could bring a spell of weaker economic demand, with the economy facing immense pressure.

Some experts suggest that a recession in NZ could be an outcome of a highly damaging alternative scenario wherein interest rates could shoot above 5%. However, certain factors are keeping these downside expectations on hold for now.

Key factors providing stability

Amid concerns of an economic slowdown, tourism and household spending have been key factors providing resilience to the economy. International tourism has recovered immensely, leaving some level of stability behind.

The unemployment rate in the country has also remained stable, with the latest Stats NZ report suggesting that the rate was 3.3% in the September 2022 quarter. Interestingly, the report also highlighted that women’s participation reached its highest level in the series at 67.4%. Additionally, feelings of job security also rose in the September 2022 quarter, as 52.8% of employed people believed there was almost no chance they would lose their job or business in the next 12 months.

Alongside these positive factors, demand in NZ has remained consistently afloat even as inflationary pressures persisted. A major factor that helped shape a stable domestic demand is the solid prevalence of mortgage rate fixing. A majority of the mortgages in NZ are on fixed rates, shielding many borrowers from the high-interest rate levels.

Many present-day borrowers had locked in their interest rates during the initial recovery phase when the OCR had been reduced to a near-zero level. Thus, the full impact of the recent rate hikes has yet to develop on households.

Continued household spending has helped keep businesses afloat and will likely strengthen the economy going into the new year. However, rising prices cannot simply be ignored and would likely provide a few more months of discomfort. Rising wages have also acted as a double-edged sword as they have raised the buying capacity of households while adding fuel to inflationary pressures. Overall, the upcoming steps taken by the RBNZ would largely shape the economic outcome for NZ in the new year.

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